We seem to have come full circle in the past ten years or so. The pipe dream of being a millionaire by virtue of owning a home – any home – is stoking unrealistic fantasies once again.

But, before we get carried away, here is a story about home ownership that might cause you to question the potential reality of that dream.

The house was built in 2007, almost concurrent with the peak in froth and expectation surrounding residential real estate at that time.

The purchase price for house and lot totaled more than one million dollars. The new owner lived in a neighboring state and planned to use it as a sort of second residence/’play-cation’ home. But let’s be frank. It was an investment. In a market that was hotter than the fires of Hell.

Since it was a custom home in a gated community, there were many upgrades. The total cost was closer to $1.1 million. After laying out a cool $250k, the balance of $850,000.00 was financed with a 30-year mortgage, interest-only payments for the first ten years at 3.75%. Cheap and easy. Are we millionaires yet?

Fast forward ten years – late 2017; the end of the ten-year period for interest-only payments. And what a ten years it has been!

Foreclosures all around, wildly fluctuating house values, slow, lackluster economic conditions. Survival of the fittest?

I wonder what the new mortgage payment will be for the next twenty years. Shouldn’t be a problem. Interest rates are at the same levels as when our ‘new millionaire’ originally financed his stake in perpetual profits. A quarter to one-half percent more won’t make much difference.

And it doesn’t. But something else does.

“What!? My projected new payment is how much!? But that is double my current payment!! And the change in interest rates is only one-quarter of one percent! How can that be?? There must be some mistake!”

But there isn’t. The current payment of $2656.00 (interest only) per month will be replaced by a new fixed payment of $5150.00 (principal and interest) per month.

And the substantial increase has almost nothing to do with interest rates. In fact, even a new, lower interest rate at the time of reset will yield similar results.

In this particular instance, ninety-three percent ($2317.00) of the increase in the monthly payment comes from amortization of the original loan amount of $850,000.00.  Since the original loan amount has not been reduced during the past ten years, it must now be paid off over the remaining twenty years of the original 30-year mortgage.

Even a new, traditional 30-year mortgage at the same interest rate will result in a new, higher payment of $4058.00 per month. That is still a fifty-three percent increase ($4058.00 minus $2656.00 = $1402.00) in the monthly amount.

Maybe it is time to sell the ‘investment’. After all, it has been more than ten years since our investor broke ground on his personal gold mine. But, after speaking with the realtor, our investor is even more discouraged.

Apparently, a reasonable asking price is somewhere in the neighborhood of $690,000.00 – $700,000.00.  That is considerably less than the purchase price of $1.1 million. And it is also less than what is still owed – $850,000.00. Which means it will have to be a short sale – if the bank will even agree.

After some negotiation, the bank agrees to a conditional listing at $749,900.00.

Exactly two months later, the asking price is reduced to $699,000.00. And a short two weeks after that, it is reduced again – to $649,000.00.

Ten long weeks later, an offer is tendered. The offered price is $550,000.00. It is quickly turned down by the bank. The listing is removed.

We need to recognize that there are several factors (past and present) that have contributed to such a situation – timing,  short-sale, economic conditions, financial distress, unrealistic expectations, new construction in the same area, etc. But, still, the numbers seem almost unbelievable. A loss of $550,000.00 – fifty percent of the original purchase price.

As bad as those numbers are, the losses are compounded by several other factors. Namely, interest on the mortgage, homeowners association dues, and the fact that the home is not a primary residence.

Interest-only payments of $2,656.00 over ten years equals $318,720.00. Add to that number another $78,000.00 ($650.00 per month) for HOA dues. Since the owner lives in and maintains a primary residence in another state, all of these costs add considerably to the financial burden incurred. Since the house has been vacant a majority of the time, there is little utility value.

Add it all up ($550,000.00 plus $318,700.00 plus $78,000.00) and the total loss exceeds $946,000.00.

Currently, the house is off the market. And after all, is said and done, its estimated value (by independent sources, of course) is $978,000.00.  Huh?!

How much is your house worth today? It is worth what you can sell it for. Not what you think it’s worth. And not what it is assessed for. Also not what your realtor or an appraiser says it is worth.

Even if our investor friend were to sell the house today for what he paid for it ten years ago – $1.1 million dollars, he would still be down by nearly $400,000.00 for interest on the mortgage amount and HOA dues.

And the negative drain continues to the tune of almost $6, 000.00 per month ($5150.00 payment plus $650.00 HOA).

And let us not forget real estate taxes, insurance, ordinary maintenance, upkeep, repairs, etc.

Admittedly, the situation would not be quite as bad if our investor were living in the house. And, yes, rental income helps, but, even on a full-time basis, there is still negative cash flow of approximately $3500.00 per month.

How many more similar situations exist out there?